Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
------------------------
FORM 10-K
------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 1-13498
ASSISTED LIVING CONCEPTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 93-1148702
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11835 NE GLENN WIDING DRIVE, BUILDING E
PORTLAND, OR 97220-9057
(503) 252-6233
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
COMMON STOCK, PAR VALUE $.01 AMERICAN STOCK EXCHANGE
6.0% CONVERTIBLE SUBORDINATED DEBENTURES DUE NOVEMBER 2002 AMERICAN STOCK EXCHANGE
5.625% CONVERTIBLE SUBORDINATED DEBENTURES DUE MAY 2003 AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. Yes [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [ ]
The Registrant had 17,120,745 shares of common stock, $.01 par value,
outstanding at March 9, 2001. The aggregate market value of the voting stock
held by non-affiliates of the registrant on such date was approximately $13.5
million.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
PART I
References in this report to "ALC," the "Company," "us" or "we" refer to
Assisted Living Concepts, Inc. and its subsidiaries.
ITEM 1. BUSINESS
OVERVIEW
We operate, own and lease free-standing assisted living residences. These
residences are primarily located in small, middle-market, rural and suburban
communities with a population typically ranging from 10,000 to 40,000. As of
December 31, 2000 we had operations in 16 states.
We also provide personal care and support services and make available
routine nursing services (as permitted by applicable law) designed to meet the
personal and health care needs of our residents. We believe that this
combination of residential, personal care, support and health care services
provides a cost-efficient alternative to, and affords an independent lifestyle
for, individuals who do not require the broader array of medical services that
nursing facilities are required by law to provide.
We experienced significant and rapid growth between 1994 and 1998,
primarily through the development of assisted living residences and, to a much
lesser extent, through acquisition of assisted living residences. When we
completed our initial public offering in November 1994 we had a base of five
leased residences (137 units). We opened twenty residences (798 units) in 1999
and no new residences in 2000. As of December 31, 2000, we had 185 assisted
living residences in operation representing an aggregate of 7,149 units. Of
these residences, we owned 115 residences (4,515 units) and leased 70 residences
(2,634 units). For the year ended December 31, 2000, our 165 Same Store
Residences (those residences that had been operating in their entirety for both
1999 and 2000) had an average occupancy rate of 83.7% and an average monthly
rental rate of $1,985 per unit.
The principal elements of our business strategy are to:
- increase occupancy and improve operating efficiencies at our existing
base of residences;
- reduce overhead costs where possible; and
- establish necessary financing to meet maturing obligations.
We anticipate that revenues at a majority of our residences will continue
to come from private pay sources. However, we believe that by having located
residences in states with favorable regulatory and reimbursement climates, we
should have a stable source of residents eligible for Medicaid reimbursement to
the extent that private pay residents are not available and, in addition,
provide our private pay residents with alternative sources of income if their
private funds are depleted and they become Medicaid eligible.
Although we manage the mix of private paying tenants and Medicaid paying
tenants residing in our facilities, any significant increase in our Medicaid
population could have an adverse effect on our financial position, results of
operations or cash flows, particularly if the states operating these programs
continue to or more aggressively seek limits on reimbursement rates. See "Risk
Factors -- We depend on reimbursement by third-party payors" included in Item 7.
Assisted Living Concepts, Inc. is a Nevada corporation. Our principal
executive offices are located at 11835 NE Glenn Widing Drive, Building E,
Portland, Oregon 97220-9057, and our telephone number is (503) 252-6233.
RECENT DEVELOPMENTS
Securityholder Litigation Settlement
In September 2000, we reached an agreement to settle the class action
litigation relating to the restatement of our financial statements for the years
ended December 31, 1996 and 1997 and the first three
1
3
fiscal quarters of 1998. This agreement received final court approval on
November 30, 2000 and we were subsequently dismissed from the litigation with
prejudice.
The total cost of the settlement was approximately $10,020,000 (less $1.0
million of legal fees and expenses reimbursed by our corporate liability
insurance carriers and other reimbursements of approximately $193,000). We made
two payments of $2.3 million each on October 23, 2000 and January 23, 2001
towards the settlement. The remaining amount due will be paid in two payments of
$2.3 million each, due on April 23, 2001 and July 23, 2001, and a final payment
of $1.0 million due within 90 days following the July 23, 2001 payment.
The settlement had been pending the approval of our corporate liability
insurance carriers who had raised certain coverage issues that resulted in the
filing of litigation between us and the carriers. These carriers consented to
the settlement, and we and the carriers agreed to dismiss the litigation
regarding coverage issues and to resolve those issues through binding
arbitration. The arbitration proceeding is pending. To the extent that the
carriers are successful, we and the carriers agreed that the carriers' recovery
is not to exceed $4.0 million. The parties further agreed that payment of any
such amount awarded will not be due in any event until 90 days after we have
satisfied our obligations to the plaintiffs in the class action, with any such
amount to be subordinated to new or refinancing of existing obligations. We
believe that we have strong defenses regarding this dispute and consequently
have not recorded a liability in relation to this matter.
As a result of the class action settlement, we recorded a charge of
approximately $10,020,000, which was partially offset by a reduction in general,
and administrative expenses of approximately $1,193,000 as a result of the
reimbursement of legal fees and expenses incurred in connection with the
litigation. The settlement resulted in an increase in net loss of $8,827,000 (or
approximately $0.52 per basic and diluted share) for the year ended December 31,
2000.
Indiana Litigation Settlement
In a lawsuit filed in 2000, the Indiana State Department of Health ("ISDH")
had alleged that we were operating our Logansport, Indiana facility known as
McKinney House, as a residential care facility without a license. We believe our
services have been consistent with those of a "Housing with Services
Establishment" (which is not required to be licensed) pursuant to Indiana Code
Section 12-10-15-1.
To avoid the expense and uncertainty of protracted litigation and, also
because we wished to assure the State that we operate in a manner that is
consistent with Indiana law, we agreed to the following settlement on behalf of
all facilities owned and operated by us in the State of Indiana. The State and
ALC agreed upon a Program Description that clarifies the services that we can
provide without requiring licensure as a residential care facility. This Program
Description provides guidelines regarding the physical and medical condition of
the residents in our facilities and the services to be provided to them. We
agreed that prior to March 20, 2001, we will provide in-service training
regarding the Program Description throughout our Indiana facilities. Under the
Program Description, we must discharge residents who require certain types or
levels of care that we agreed not to provide in Indiana. We are currently
implementing the Program Description and, while its full impact is not now
known, we do not expect the impact to be material to our financial condition,
results of operations, cash flow and liquidity. Without admitting liability, we
paid a civil penalty of $10,000. The State dismissed the lawsuit against us with
prejudice.
Management Changes
On March 3, 2000, our Board of Directors announced the appointment of Wm.
James Nicol and John Gibbons to the Board, including the appointment of Mr.
Nicol as Chairman of the Board. We also announced the formation of an Executive
Committee of our Board of Directors comprised of Dr. Keren Brown Wilson, Mr.
Nicol and Mr. Gibbons. On March 3, 2000, we also announced the resignation of
James W. Cruckshank as our Chief Financial Officer and the appointment of Mr.
Gibbons as Interim Chief Financial Officer. At that time, we entered into a
Separation and Consulting Agreement with Mr. Cruckshank, pursuant to which Mr.
Cruckshank's employment agreement with us was terminated, and Mr. Cruckshank
agreed to provide us
2
4
with consulting services through the end of 2000. See "Executive
Compensation -- Agreements with Former Officers" included in Item 11.
On March 16, 2000, we announced the appointment of Drew Q. Miller as Senior
Vice President, Chief Financial Officer and Treasurer and the resignation of Mr.
Gibbons as Interim Chief Financial Officer.
On April 21, 2000, we eliminated the position of Vice President and Chief
Operating Officer which had been held by Leslie Mahon. Keren Brown Wilson
assumed these duties until her position of President and CEO was restructured in
October, 2000.
Effective October 19, 2000, Dr. Wilson resigned as President and Chief
Executive Officer and from our Board. She will remain active with us, continuing
to represent us at various assisted living industry events and providing
consulting services to us, as requested, until December 31, 2001. We incurred a
charge of $800,000 in the fourth quarter of 2000 in connection with her
resignation, such amount to be paid out over the fourteen-month period ending
December 31, 2001.
Upon the resignation of Dr. Wilson, Mr. Nicol served as the Acting
President and Chief Executive Officer until his permanent appointment. On
November 8, 2000, our Board appointed Wm. James Nicol as President and Chief
Executive Officer and Jill M. Krueger replaced Dr. Wilson on the Executive
Committee.
In January, 2001, our Board determined the Executive Committee was no
longer needed and discontinued it.
Annual Meeting of Shareholders
On January 16, 2001, we held our annual shareholders' meeting. The sole
purpose of this meeting was the re-election of two of our directors, Richard C.
Ladd and Jill M. Krueger, and the election of four new directors, Wm. James
Nicol (Chairman, President & Chief Executive Officer), John M. Gibbons, Leonard
Tannenbaum and Bruce E. Toll. Following the meeting, Mr. Gibbons was appointed
Vice Chairman of the Board.
Modification and Amendment to Rights Agreement
On November 8, 2000, we modified and amended our Rights Agreement to
provide that the acquisition of up to $15.0 million in face value of our
convertible debentures is not to be considered "beneficially owned," as defined
under the Rights Agreement, for purposes of calculating whether a beneficial
owner owns 15% or more of our common shares then outstanding, in which event
certain rights as described in the Rights Agreement would arise.
Amendment of Loan Documents
On March 12, 2001, we amended certain loan documents with U. S. Bank
National Association ("U.S. Bank"). Pursuant to the amendment, we agreed to pay
fees of $34,700 in exchange for the following: the modification of certain
financial covenants, and the waiver of U.S. Bank's right to declare an event of
default for our failure to comply with certain financial covenants as of
December 31, 2000 and for our anticipated failure to comply with certain
financial covenants for the three months ending March 31, 2001. The amendment
also provides the following: approval for us to repurchase for cash up to $25.0
million in face value of our convertible debentures prior to maturity; a
requirement that we deposit $500,000 in cash collateral with U.S. Bank in the
event certain regulatory actions are commenced with respect to the properties
securing our obligations to U.S. Bank; and the requirement that U.S. Bank
release such deposits to us upon satisfactory resolution of the regulatory
action.
Additional Financing
In November 2000, we entered into a short-term bridge loan with Red
Mortgage Capital, Inc. ("Red Mortgage") in the amount of $4.0 million secured by
three previously unencumbered properties. This loan matures on August 1, 2001,
requires monthly interest-only payments until maturity and bears interest at the
3
5
greater of 10% or LIBOR plus 3.5%. We intend to replace this loan with long-term
HUD financing prior to its maturity.
On March 2, 2001, we entered into an agreement with Heller Healthcare
Finance, Inc. ("Heller") for a $45.0 million line of credit, under which five
wholly owned subsidiaries are the jointly and severally liable borrowers of any
funds drawn. This line matures on August 31, 2002 and requires monthly
interest-only payments until maturity. This line bears an interest rate of 3.85%
over the three-month LIBOR rate floating monthly and will be secured by up to 32
properties owned by the borrowers and leased to another of our affiliates or us.
We guaranteed the line. In addition to having paid a commitment fee of $450,000,
we are to pay funding fees of 0.5% of the principal amount funded at the time of
funding and pay an exit fee of 1.0% of the principal being repaid. The borrowers
may elect to exercise up to three six-month extensions of the maturity date,
subject to the satisfaction of certain conditions. We intend to replace a
substantial portion of this financing with long-term HUD financing to the extent
the processing time and increasing limitations by HUD on submission of
applications and amount financed permit. While the line remains outstanding, we
have agreed that all of our remaining unencumbered properties, except one, will
remain unencumbered, unless the net proceeds of such financing are used to
repurchase our convertible debentures or pay off other indebtedness (if approved
by Heller). Proceeds of the line may be used for the payment of our
shareholders' litigation settlement, the repurchase of 16 of our leased
properties and the repurchase of some of our convertible debentures. Our initial
draw on this line was $1.3 million on March 2, 2001.
Option Cancellation
In November 2000, the Board of Directors, at the recommendation of the
Compensation Committee, approved an offer (the "Offer") to holders of options
under both the 1994 Stock Option Plan and the Non-Executive Employee Equity
Participation Plan. We agreed to make lump sum payments of $250 to each option
holder who agreed to the cancellation of all of their options having an exercise
price of $5.00 or greater ("Eligible Options"), except that certain executive
officers, directors, and consultants were asked to agree to the cancellation of
their Eligible Options without any such payment. We completed the Offer in
December 2000, paying approximately $17,000 for the cancellation of options
covering the issuance of 596,103 shares of common stock.
SERVICES
Our residences offer residents a supportive, "home-like" setting and
assistance with activities of daily living. Residents are individuals who, for a
variety of reasons, cannot live alone, or elect not to do so, and do not need
the 24-hour skilled medical care provided in nursing facilities. We design
services provided to these residents to respond to their individual needs and to
improve their quality of life. This individualized assistance is available 24
hours a day, to meet both anticipated and unanticipated needs, including routine
health-related services, which are made available and are provided according to
the resident's individual needs and state regulatory requirements. Available
services include:
- General services, such as meals, laundry and housekeeping;
- Support services, such as assistance with medication, monitoring health
status, coordination of transportation; and
- Personal care, such as dressing, grooming and bathing.
We also provide or arrange access to additional services beyond basic
housing and related services, including physical therapy and pharmacy services.
Although a typical package of basic services provided to a resident
includes meals, housekeeping, laundry and personal care, we do not have a
standard service package for all residents. Instead, we are able to accommodate
the changing needs of our residents through the use of individual service plans
and flexible staffing patterns. Our multi-tiered rate structure for services is
based upon the acuity of, or level of services needed by, each resident.
Supplemental and specialized health-related services for those residents
requiring 24-hour supervision or more extensive assistance with activities of
daily living are provided by third-party
4
6
providers who are reimbursed directly by the resident or a third-party payor
(such as Medicaid or long-term care insurance). Our policy is to assess the
level of need of each resident regularly.
OPERATIONS
Each residence has an on-site program director who is responsible for the
overall day-to-day operation of the residence, including quality of care,
marketing, social services and financial performance. The program director is
assisted by professional and non-professional personnel, some of whom may be
independent providers or part-time personnel, including nurses, personal service
assistants, maintenance and kitchen personnel. The nursing hours vary depending
on the residents' needs. We consult with outside providers, such as registered
nurses, pharmacists, and dietitians, for purposes of medication review, menu
planning and responding to any special dietary needs of residents. Personal
service assistants who primarily are full-time employees are responsible for
personal care, dietary services, housekeeping and laundry services. Maintenance
services are performed by full and part-time employees.
We have established an infrastructure that includes 4 regional vice
presidents of operations who oversee the overall performance and finances of
each region, 16 regional operations managers who oversee the day-to-day
operations of up to 10 to 12 residences, and team leaders who provide peer
support for up to three to four residences. Residence personnel also are
supported by corporate staff based at our headquarters. We also have regional
property managers who oversee the maintenance of the residences and several
regional marketing coordinators who assist with marketing the residence.
Corporate and regional personnel work with the program directors to establish
residence goals and strategies, quality assurance oversight, development of
Company policies and procedures, government relations, marketing and sales,
community relations, development and implementation of new programs, cash
management, legal support, treasury functions, and human resource management.
COMPETITION
The long-term care industry generally is highly competitive. We expect that
the assisted living business, in particular, will become even more competitive
in the future given the relatively low barriers to entry and continuing health
care cost containment pressures.
We compete with numerous other companies providing similar long-term care
alternatives. We operate in 16 states and each community in which we operate
provides a unique market. Overall, most of our markets include an assisted
living competitor offering assisted living facilities that are similar in size,
price and range of service. Our competitors include other companies that provide
adult day care in the home, higher priced assisted living centers (typically
larger facilities with more amenities), congregate care facilities where tenants
elect the services to be provided, and continuing care retirement centers on
campus like settings.
We expect to face increased competition from new market entrants as
assisted living receives increased attention and the number of states which
include assisted living in their Medicaid programs increases. Competition will
also grow from new market entrants, including publicly and privately held
companies focusing primarily on assisted living. Nursing facilities that provide
long-term care services are also a potential source of competition for us.
Providers of assisted living residences compete for residents primarily on the
basis of quality of care, price, reputation, physical appearance of the
facilities, services offered, family preferences, physician referrals and
location. Some of our competitors operate on a not-for-profit basis or as
charitable organizations. Some of our competitors are significantly larger than
us and have, or may obtain, greater resources than ours. While we generally
believe that there is moderate competition for less expensive segments of the
private market and for Medicaid residents in small communities, we have seen an
increase in competition in certain of our markets.
We believe that many assisted living markets have become overbuilt.
Regulation and other barriers to entry into the assisted living industry are not
substantial. In addition, because the segment of the population that can afford
to pay our daily resident fee is finite, the number of new assisted living
facilities may outpace demand in some markets. The effects of such overbuilding
include (a) significantly longer fill-up periods, (b) pressure to lower or
refrain from increasing rates, (c) competition for workers in already tight
labor
5
7
markets and (d) lower margins until excess units are absorbed. We have
experienced slower fill-up than expected of new residences in some markets as
well as declining occupancy in our stabilized residences due to the increase in
options available to potential new residents when units are vacated. We believe
that each local market is different, and we are and will continue to react in a
variety of ways, including selective price discounting, to the specific
competitive environment that exists in each market. There can be no assurance
that we will be able to compete effectively in those markets where overbuilding
exists, or that future overbuilding in other markets where we operate our
residences will not adversely affect our operations.
FUNDING
Assisted living residents or their families generally pay the cost of care
from their own financial resources. Depending on the nature of an individual's
health insurance program or long-term care insurance policy, the individual may
receive reimbursement for costs of care under an "assisted living," "custodial"
or "alternative care benefit." Government payments for assisted living have been
limited. Some state and local governments offer subsidies for rent or services
for low-income elders. Others may provide subsidies in the form of additional
payments for those who receive Supplemental Security Income (SSI). Medicaid
provides coverage for certain financially or medically needy persons, regardless
of age, and is funded jointly by federal, state and local governments. Medicaid
contracts for assisted living vary from state to state.
In 1981, the federal government approved a Medicaid waiver program called
Home and Community Based Care which was designed to permit states to develop
programs specific to the healthcare and housing needs of the low-income elderly
eligible for nursing home placement (a "Medicaid Waiver Program"). In 1986,
Oregon became the first state to use federal funding for licensed assisted
living services through a Medicaid Waiver Program authorized by the Health Care
Financing Administration ("HCFA"). Under a Medicaid Waiver Program, states apply
to HCFA for a waiver to use Medicaid funds to support community-based options
for the low-income elderly who need long-term care. These waivers permit states
to reallocate a portion of Medicaid funding for nursing facility care to other
forms of care such as assisted living. In 1994, the federal government
implemented new regulations which empowered states to further expand their
Medicaid Waiver Programs and eliminated restrictions on the amount of Medicaid
funding states could allocate to community-based care, such as assisted living.
A limited number of states including Oregon, New Jersey, Texas, Arizona,
Nebraska, Florida, Idaho and Washington currently have operating Medicaid Waiver
Programs that allow them to pay for assisted living care. We participate in
Medicaid programs in all of these states except Florida. Without a Medicaid
Waiver Program, states can only use federal Medicaid funds for long-term care in
nursing facilities.
During the years ended December 31, 1998, 1999 and 2000, direct payments
received from state Medicaid agencies accounted for approximately 10.7%, 10.4%
and 11.1%, respectively, of our revenue while the tenant-paid portion received
from Medicaid residents accounted for approximately 5.8%, 5.9% and 6.2%,
respectively, of our revenue during these periods. We expect in the future that
state Medicaid reimbursement programs will continue to constitute a significant
source of our revenue.
GOVERNMENT REGULATION
Our assisted living residences are subject to certain state statutes, rules
and regulations, including those which provide for licensing requirements. In
order to qualify as a state licensed facility, our residences must comply with
regulations which address, among other things, staffing, physical design,
required services and resident characteristics. As of December 31, 2000, we had
obtained licenses in Oregon, Washington, Idaho, Nebraska, Texas, Arizona, Iowa,
Louisiana, Ohio, New Jersey, Pennsylvania, Florida, Michigan, Georgia and South
Carolina. We are not currently subject to state licensure requirements in
Indiana. Our residences are also subject to various local building codes and
other ordinances, including fire safety codes. These requirements vary from
state to state and are monitored to varying degrees by state agencies.
As a provider of services under the Medicaid program in the United States,
we are subject to Medicaid fraud and abuse laws, which prohibit any bribe,
kickback, rebate or remuneration of any kind in return for the referral of
Medicaid patients, or to induce the purchasing, leasing, ordering or arranging
of any goods or
6
8
services to be paid for by Medicaid. Violations of these laws may result in
civil and criminal penalties and exclusions from participation in the Medicaid
program. The Inspector General of the Department of Health and Human Services
issued "safe harbor" regulations specifying certain business practices, which
are exempt from sanctions under the fraud and abuse law. Several states in which
we operate have laws that prohibit certain direct or indirect payments or
fee-splitting arrangements between health care providers if such arrangements
are designed to induce or encourage the referral of patients to a particular
provider. We at all times attempt to comply with all applicable fraud and abuse
laws. There can be no assurance that administrative or judicial interpretation
of existing laws or regulations or enactments of new laws or regulations will
not have a material adverse effect on our results of operations or financial
condition.
Currently, the federal government does not regulate assisted living
residences as such. State standards required of assisted living providers are
less in comparison with those required of other licensed health care operators.
Current Medicaid regulations provide for comparatively flexible state control
over the licensure and regulation of assisted living residences. There can be no
assurance that federal regulations governing the operation of assisted living
residences will not be implemented in the future or that existing state
regulations will not be expanded.
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. Although we believe that our facilities are
substantially in compliance with, or are exempt from, present requirements, we
will incur additional costs if required changes involve a greater expenditure
than anticipated or must be made on a more accelerated basis than anticipated.
Further legislation may impose additional burdens or restrictions with respect
to access by disabled persons, the costs of compliance with which could be
substantial.
See Risk Factors, "We are subject to significant government regulation."
LIABILITY AND INSURANCE
Providing services in the senior living industry involves an inherent risk
of liability. Participants in the senior living and long-term care industry are
subject to lawsuits alleging negligence or related legal theories, many of which
may involve large claims and result in the incurrence of significant legal
defense costs. We currently maintain insurance policies to cover such risks in
amounts which we believe are in keeping with industry practice. There can be no
assurance that a claim in excess of our insurance will not be asserted. A claim
against us not covered by, or in excess of, our insurance, could have a material
adverse affect on us.
Based on poor loss experience, insurers for the long term care industry
have become increasingly wary of liability exposures. A number of insurance
carriers have stopped writing coverage to this market, and those remaining have
increased premiums and deductibles substantially. While nursing homes have been
the primary targets of these insurers, assisted living companies, including us,
have experienced premium and deductible increases. During the claim year ended
December 31, 2000, our professional liability insurance coverage included
deductible levels of $100,000 per incident; for the claim year ending December
31, 2001 this deductible level has been replaced with a retention level of
$250,000 for all states except Florida and Texas in which our retention level is
$500,000. In certain states, particularly Florida and Texas, many long-term care
providers are facing very difficult renewals. There can be no assurance that we
will be able to obtain liability insurance in the future or that, if such
insurance is available, it will be available on terms acceptable to us.
EMPLOYEES
As of December 31, 2000 we had 3,613 employees, of whom 1,628 were
full-time employees and 1,985 were part-time employees. None of our employees
are represented by any labor union. We believe that our labor relations are
generally good.
7
9
ITEM 2. PROPERTIES
The following chart sets forth, as of December 31, 2000 the location,
number of units, date of licensure, and ownership status of our residences. In
addition, the chart sets forth occupancy rates as of December 31, 2000.
OPENING OCCUPANCY (%)
RESIDENCE UNITS DATE(1) OWNERSHIP(2) AT 12/31/00(3)
--------- ----- ------- ------------ --------------
WEST REGION
Idaho
Burley......................................... 35 08/97 Leased 100.0
Caldwell....................................... 35 08/97 Leased 100.0
Garden City.................................... 48 04/97 Owned 91.7
Hayden......................................... 39 11/96 Leased 94.9
Idaho Falls.................................... 39 01/97 Owned 43.6
Moscow......................................... 35 04/97 Owned 40.0
Nampa.......................................... 39 02/97 Leased 94.9
Rexburg........................................ 35 08/97 Owned 77.1
Twin Falls..................................... 39 09/97 Owned 64.1
-----
Sub Total............................ 344 78.8
Oregon
Astoria........................................ 28 08/96 Owned 92.9
Bend........................................... 46 11/95 Owned 100.0
Brookings...................................... 36 07/96 Owned 97.2
Canby.......................................... 25 12/90 Leased 96.0
Estacada....................................... 30 01/97 Owned 76.7
Eugene......................................... 47 08/97 Leased 93.6
Hood River..................................... 30 10/95 Owned 100.0
Klamath Falls.................................. 36 10/96 Leased 100.0
Lincoln City................................... 33 10/94 Owned 78.8
Madras......................................... 27 03/91 Owned 96.3
Myrtle Creek................................... 34 03/96 Leased 79.4
Newberg........................................ 26 10/92 Leased 100.0
Newport........................................ 36 06/96 Leased 91.7
Pendleton...................................... 39 04/91 Leased 87.2
Prineville..................................... 30 10/95 Owned 90.0
Redmond........................................ 37 03/95 Leased 94.6
Silverton...................................... 30 07/95 Owned 83.3
Sutherlin...................................... 30 01/97 Leased 96.7
Talent......................................... 36 10/97 Owned 91.7
-----
Sub Total............................ 636 92.0
Washington
Battleground................................... 40 11/96 Leased 97.5
Bremerton(4)................................... 39 05/97 Owned 97.4
Camas.......................................... 36 03/96 Leased 94.4
Enumclaw....................................... 40 04/97 Owned 95.0
Ferndale....................................... 39 10/98 Owned 92.3
Grandview...................................... 36 02/96 Leased 91.7
Hoquiam........................................ 40 07/97 Leased 82.5
Kelso.......................................... 40 08/96 Leased 90.0
8
10
OPENING OCCUPANCY (%)
RESIDENCE UNITS DATE(1) OWNERSHIP(2) AT 12/31/00(3)
--------- ----- ------- ------------ --------------
Kennewick...................................... 36 12/95 Leased 86.1
Port Orchard................................... 39 06/97 Owned 89.7
Port Townsend.................................. 39 01/98 Owned 100.0
Spokane........................................ 39 09/97 Owned 92.3
Sumner(4)...................................... 48 03/98 Owned 83.3
Vancouver...................................... 44 06/96 Leased 86.4
Walla Walla.................................... 36 02/96 Leased 100.0
Yakima......................................... 48 07/98 Owned 97.9
-----
Sub Total............................ 639 92.2
Arizona
Apache Junction................................ 48 03/98 Owned 64.6
Bullhead City.................................. 40 08/97 Leased 70.0
Lake Havasu.................................... 36 04/97 Leased 100.0
Mesa........................................... 50 01/98 Owned 68.0
Payson......................................... 39 10/98 Owned 82.1
Peoria......................................... 50 07/99 Owned 42.0
Prescott Valley................................ 39 10/98 Owned 87.2
Surprise....................................... 50 10/98 Owned 32.0
Yuma........................................... 48 03/98 Owned 93.8
-----
Sub Total............................ 400 69.3
CENTRAL REGION
Texas
Abilene........................................ 38 10/96 Leased 86.8
Amarillo....................................... 50 03/96 Leased 96.0
Athens......................................... 38 11/95 Leased 94.7
Beaumont....................................... 50 04/96 Leased 78.0
Big Springs.................................... 38 05/96 Leased 89.5
Bryan.......................................... 30 06/96 Leased 100.0
Canyon......................................... 30 06/96 Leased 96.7
Carthage....................................... 30 10/95 Leased 96.7
Cleburne....................................... 45 01/96 Owned 100.0
Conroe......................................... 38 07/96 Leased 97.4
College Station................................ 39 10/96 Leased 76.9
Denison........................................ 30 01/96 Owned 100.0
Gainesville.................................... 40 01/96 Leased 100.0
Greenville..................................... 41 11/95 Leased 100.0
Gun Barrel City................................ 40 10/95 Leased 90.0
Henderson...................................... 30 09/96 Leased 83.3
Jacksonville................................... 39 12/95 Leased 97.4
Levelland...................................... 30 01/96 Leased 93.3
Longview....................................... 30 09/95 Leased 100.0
Lubbock........................................ 50 07/96 Leased 88.0
Lufkin......................................... 39 05/96 Leased 87.2
Marshall....................................... 40 07/95 Leased 80.0
McKinney....................................... 39 01/97 Owned 100.0
McKinney....................................... 50 05/98 Owned 84.0
Mesquite....................................... 50 07/96 Leased 98.0
9
11
OPENING OCCUPANCY (%)
RESIDENCE UNITS DATE(1) OWNERSHIP(2) AT 12/31/00(3)
--------- ----- ------- ------------ --------------
Midland........................................ 50 12/96 Owned 84.0
Mineral Wells.................................. 30 07/96 Leased 100.0
Nacogdoches.................................... 30 06/96 Leased 100.0
Orange......................................... 36 03/96 Leased 88.9
Pampa.......................................... 36 08/96 Leased 91.7
Paris Oaks..................................... 50 12/98 Owned 100.0
Plainview...................................... 36 07/96 Leased 88.9
Plano.......................................... 64 05/98 Owned 76.6
Port Arthur.................................... 50 05/96 Owned 96.0
Rowlett........................................ 36 10/96 Owned 97.2
Sherman........................................ 39 10/95 Leased 102.6
Sulphur Springs................................ 30 01/96 Owned 93.3
Sweetwater..................................... 30 03/96 Leased 100.0
Temple......................................... 40 01/97 Leased 80.0
Wichita Falls.................................. 50 10/96 Leased 100.0
-----
Sub Total............................ 1,581 92.2
Nebraska
Beatrice....................................... 39 07/97 Leased 97.4
Blair.......................................... 30 07/98 Owned 70.0
Columbus....................................... 39 06/98 Owned 97.4
Fremont........................................ 39 05/98 Owned 100.0
Nebraska City.................................. 30 06/98 Owned 90.0
Norfolk........................................ 39 04/97 Leased 84.6
Seward......................................... 30 10/98 Owned 70.0
Wahoo.......................................... 39 06/97 Leased 79.5
York........................................... 39 05/97 Leased 92.3
-----
Sub Total............................ 324 87.7
Iowa
Atlantic....................................... 30 09/98 Owned 86.7
Carroll........................................ 35 01/99 Owned 100.0
Clarinda....................................... 35 09/98 Owned 100.0
Council Bluffs................................. 50 03/99 Owned 68.0
Denison........................................ 35 05/98 Leased 88.6
Sergeant Bluff................................. 39 11/99 Owned 28.2
-----
Sub Total............................ 224 76.8
SOUTHEAST REGION
Georgia
Rome........................................... 39 08/99 Owned 51.3
Florida
Defuniak Springs............................... 39 07/99 Owned 53.9
Milton......................................... 39 06/99 Owned 79.5
NW Pensacola................................... 39 06/99 Owned 43.6
Quincy......................................... 39 04/99 Owned 48.7
-----
Sub Total............................ 156 56.4
10
12
OPENING OCCUPANCY (%)
RESIDENCE UNITS DATE(1) OWNERSHIP(2) AT 12/31/00(3)
--------- ----- ------- ------------ --------------
Louisiana
Alexandria..................................... 48 07/98 Owned 45.8
Bunkie......................................... 39 01/99 Owned 59.0
Houma.......................................... 48 08/98 Owned 89.6
Ruston......................................... 39 01/99 Owned 89.7
-----
Sub Total............................ 174 70.7
South Carolina
Aiken.......................................... 39 02/98 Owned 97.4
Clinton........................................ 39 11/97 Leased 89.7
Goose Creek.................................... 39 08/98 Owned 79.5
Greenwood...................................... 39 05/98 Leased 76.9
Greer.......................................... 39 06/99 Owned 89.7
James Island................................... 39 08/98 Owned 97.4
North Augusta.................................. 39 10/98 Owned 82.1
Port Royal..................................... 39 09/98 Owned 74.4
Summerville.................................... 39 02/98 Owned 87.2
-----
Sub Total............................ 351 86.0
EAST REGION
Indiana
Bedford........................................ 39 03/98 Owned 97.4
Bloomington.................................... 39 01/98 Owned 41.0
Camby.......................................... 39 12/98 Owned 87.2
Crawfordsville................................. 39 06/99 Owned 100.0
Elkhart........................................ 39 09/97 Leased 76.9
Fort Wayne..................................... 39 06/98 Owned 53.9
Franklin....................................... 39 05/98 Owned 46.2
Huntington..................................... 39 02/98 Owned 87.2
Jeffersonville................................. 39 03/99 Owned 12.8
Kendallville................................... 39 05/98 Owned 48.7
Lafayette...................................... 39 11/99 Owned 82.1
LaPorte........................................ 39 10/98 Owned 53.9
Logansport..................................... 39 02/98 Owned 89.7
Madison........................................ 39 10/97 Leased 74.4
Marion......................................... 39 03/98 Owned 43.6
Muncie......................................... 39 02/98 Owned 89.7
New Albany..................................... 39 05/98 Owned 74.4
New Castle..................................... 39 02/98 Owned 97.4
Seymour........................................ 39 05/98 Owned 94.9
Shelbyville.................................... 39 05/98 Owned 51.3
Warsaw......................................... 39 10/97 Owned 51.3
-----
Sub Total............................ 819 69.2
Michigan
Coldwater...................................... 39 10/99 Owned 66.7
Kalamazoo...................................... 39 11/99 Owned 66.7
Three Rivers................................... 39 04/99 Owned 56.4
-----
Sub Total............................ 117 63.3
11
13
OPENING OCCUPANCY (%)
RESIDENCE UNITS DATE(1) OWNERSHIP(2) AT 12/31/00(3)
--------- ----- ------- ------------ --------------
New Jersey
Bridgeton...................................... 39 03/98 Owned 89.7
Burlington..................................... 39 11/97 Owned 94.9
Egg Harbor..................................... 39 04/99 Owned 97.4
Glassboro...................................... 39 03/97 Leased 97.4
Millville...................................... 39 05/97 Leased 92.3
Pennsville..................................... 39 11/97 Owned 94.9
Rio Grande..................................... 39 11/97 Owned 94.9
Vineland....................................... 39 01/97 Leased 82.1
-----
Sub Total............................ 312 93.0
Ohio
Bellefontaine.................................. 35 03/97 Owned 48.6
Bucyrus........................................ 35 01/97 Owned 100.0
Cambridge...................................... 39 10/97 Owned 100.0
Celina......................................... 39 04/97 Owned 76.9
Defiance....................................... 35 02/96 Owned 94.3
Findlay........................................ 39 03/97 Owned 56.4
Fremont........................................ 39 07/97 Leased 92.3
Greenville..................................... 39 02/97 Owned 100.0
Hillsboro...................................... 39 03/98 Owned 53.9
Kenton......................................... 35 03/97 Owned 91.4
Lima........................................... 39 06/97 Owned 28.2
Marion......................................... 39 04/97 Owned 92.3
Newark......................................... 39 10/97 Leased 100.0
Sandusky....................................... 39 09/98 Owned 59.0
Tiffin......................................... 35 06/97 Leased 85.7
Troy........................................... 39 03/97 Leased 100.0
Wheelersburg................................... 39 09/97 Leased 59.0
Zanesville..................................... 39 12/97 Owned 92.3
-----
Sub Total............................ 682 79.3
Pennsylvania
Butler......................................... 39 12/97 Owned 94.9
Hermitage...................................... 39 03/98 Owned 64.1
Indiana........................................ 39 03/98 Owned 71.8
Johnstown...................................... 39 06/98 Owned 56.4
Latrobe........................................ 39 12/97 Owned 92.3
Lower Burrell.................................. 39 01/97 Owned 102.6
New Castle..................................... 39 04/98 Owned 94.9
Penn Hills..................................... 39 05/98 Owned 79.5
Uniontown...................................... 39 06/98 Owned 92.3
-----
Sub Total............................ 351 82.9
-----
Grand Total.......................... 7,149 83.0%
=====
- ---------------
(1) Reflects the date operations commenced, typically the licensure date for
developed residences and the date of purchase for acquired residences.
(2) As of December 31, 2000, we owned 115 residences and we leased 70 residences
pursuant to long-term operating leases. Of the 115 owned residences, 37 are
subject to permanent mortgage financing, 3 are
12
14
subject to short-term loans which we intend to replace with permanent HUD
mortgage financing, 8 secure our litigation payable, 3 were added as
additional security for one lender and 16 were used as collateral for a
financing that occurred subsequent to December 31, 2000. See Notes 5, 8 and
19 to the consolidated financial statements included elsewhere herein.
(3) Occupancy is calculated based upon occupied units at December 31, 2000.
(4) As of December 31, 2000, Bremerton and Sumner had received notices of stop
placement of admissions and Sumner had received a notice of license
revocation from the State of Washington Department of Social and Health
Services. These matters were still outstanding at the time of this filing.
In 2000, we also leased office space for the corporate office in Portland,
Oregon and the regional offices in Vancouver, WA; Dallas, Texas; Omaha,
Nebraska; and Dublin, Ohio.
ITEM 3. LEGAL PROCEEDINGS
Securityholder Litigation Settlement
In September 2000, we reached an agreement to settle the class action
litigation relating to the restatement of our financial statements for the years
ended December 31, 1996 and 1997 and the first three fiscal quarters of 1998.
This agreement received final court approval on November 30, 2000 and we were
subsequently dismissed from the litigation with prejudice.
The total cost of the settlement was approximately $10,020,000 (less $1.0
million of legal fees and expenses reimbursed by our corporate liability
insurance carriers and other reimbursements of approximately $193,000). We made
two payments of $2.3 million each on October 23, 2000 and January 23, 2001
towards the settlement. The remaining amount due will be paid in two payments of
$2.3 million each, due on April 23, 2001 and July 23, 2001, and a final payment
of $1.0 million due within 90 days following the July 23, 2001 payment.
The settlement had been pending the approval of our corporate liability
insurance carriers who had raised certain coverage issues that resulted in the
filing of litigation between us and the carriers. These carriers consented to
the settlement, and we and the carriers agreed to dismiss the litigation
regarding coverage issues and to resolve those issues through binding
arbitration. The arbitration proceeding is pending. To the extent that the
carriers are successful, we and the carriers agreed that the carriers' recovery
is not to exceed $4.0 million. The parties further agreed that payment of any
such amount awarded will not be due in any event until 90 days after we have
satisfied our obligations to the plaintiffs in the class action, with any such
amount to be subordinated to new or refinancing of existing obligations. We
believe that we have strong defenses regarding this dispute and consequently
have not recorded a liability in relation to this matter.
As a result of the class action settlement, we recorded a charge of
approximately $10,020,000, which was partially offset by a reduction in general,
and administrative expenses of approximately $1,193,000 as a result of the
reimbursement of legal fees and expenses incurred in connection with the
litigation. The settlement resulted in an increase in net loss of $8,827,000 (or
approximately $0.52 per basic and diluted share) for the year ended December 31,
2000.
Indiana Litigation Settlement
In a lawsuit filed in 2000, the Indiana State Department of Health ("ISDH")
had alleged that we were operating our Logansport, Indiana facility known as
McKinney House as a residential care facility without a license. We believe our
services have been consistent with those of a "Housing with Services
Establishment" (which is not required to be licensed) pursuant to Indiana Code
Section 12-10-15-1.
To avoid the expense and uncertainty of protracted litigation and, also
because we wished to assure the State that we operate in a manner that is
consistent with Indiana law, we agreed to the following settlement on behalf of
all facilities owned and operated by us in the State of Indiana. The State and
ALC agreed upon a Program Description that clarifies the services that we can
provide without requiring licensure as a residential care facility. This Program
Description provides guidelines regarding the physical and medical condition of
the
13
15
residents in our facilities and the services to be provided to them. We agreed
that prior to March 20, 2001, we will provide in-service training regarding the
Program Description throughout our Indiana facilities. Under the Program
Description, we must discharge residents who require certain types or levels of
care that we agreed not to provide in Indiana. We are currently implementing the
Program Description and, while its full impact is not now known, we do not
expect the impact to be material to our financial condition, results of
operations, cash flow and liquidity. Without admitting liability, we paid a
civil penalty of $10,000. The State dismissed the lawsuit against us with
prejudice.
Other Litigation
In addition to the matters referred to in the immediately preceding
paragraphs, we are involved in various lawsuits and claims arising in the normal
course of business. In the aggregate, such other suits and claims should not
have a material adverse effect on our financial condition, results of
operations, cash flow and liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
We held our Annual Meeting of Stockholders on January 16, 2001. The meeting
involved the election of six directors. The directors who were nominated and
elected to serve as directors until the 2002 Annual Meeting of Stockholders and,
in each case, until their respective successors are duly elected and qualified
were Wm. James Nicol, John M. Gibbons, Jill M. Krueger, Richard C. Ladd, Bruce
E. Toll and Leonard Tannenbaum. Shares represented at the annual meeting were
15,669,644 of total outstanding shares of 17,120,745 to reach a quorum of 91.5%.
The results of the election were at least 87.3% in favor of each of the above
six directors.
14
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our Common Stock, par value $0.01 (the "Common Stock"), is listed on the
American Stock Exchange ("AMEX") under the symbol "ALF." The following table
sets forth the high and low closing sales prices of the Common Stock, as
reported by the AMEX, for the periods indicated.
1998 1999(1) 2000
---------------- --------------- --------------
HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ----- ----- -----
Years ended December 31:
1st Quarter....................... $21.63 $17.50 $14.50 $3.31 $2.38 $1.31
2nd Quarter....................... 21.38 14.13 3.31 2.88 1.50 0.63
3rd Quarter....................... 18.00 12.44 -- -- 0.88 0.44
4th Quarter....................... 14.50 9.88 2.25 .81 0.63 0.19
- ---------------
(1) On April 15, 1999, the AMEX halted trading in the Common Stock. Trading was
resumed on October 4, 1999 after our restatement related to the years ended
December 31, 1996 and 1997 and the first three fiscal quarters of 1998 was
completed.
As of December 31, 2000, we had approximately 99 holders of record of
Common Stock. We are unable to estimate the number of additional shareholders
whose shares are held for them in street name or nominee accounts.
Our current policy is to retain any earnings to finance the operations of
our business. In addition, certain outstanding indebtedness and certain lease
agreements restrict the payment of cash dividends. It is anticipated that the
terms of future debt financing may do so as well. Therefore, the payment of any
cash dividends on the Common Stock is unlikely in the foreseeable future.
Our common stock currently is listed on the AMEX under the symbol "ALF,"
our 5.625% Convertible Subordinated Debentures due 2003 (the "5.625%
Debentures") currently are listed on AMEX under the symbol "ALS5E03" and our
6.0% Convertible Subordinated Debentures due 2002 (the "6.0% Debentures")
currently are listed on AMEX under the symbol "ALS6K02." AMEX recently notified
us that we had fallen below certain of AMEX's continued listing guidelines and
that it was reviewing our listing eligibility. In particular, we have incurred
losses from continued operations for each of its past six fiscal years ending
December 31, 2000, and the price per share of our common stock as quoted on AMEX
recently has been below the minimum bid price of $1.00 per share. We may choose
to effect a reverse stock split in the event that the price of our common stock
does not otherwise meet the minimum bid requirement. However, we reported a net
loss of $1.51 per basic and diluted share for the year ended December 31, 2000,
and may not report net income in the near future. We have provided AMEX with
additional information and have been involved in ongoing discussions with AMEX
in connection with its review of our listing eligibility. While AMEX has decided
not to delist us at this time, they will continue to review our listing status
on a quarterly basis.
If AMEX were to delist our securities, it is possible that the securities
would continue to trade on the over-the-counter market. However, the extent of
the public market for the securities and the availability of quotations would
depend upon such factors as the aggregate market value of each class of the
securities, the interest in maintaining a market in such securities on the part
of securities firms and other factors. There can be no assurance that any public
market for our securities will exist in the event that such securities are
delisted.
15
17
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical consolidated financial
data. The consolidated statement of operations data for the years ended December
31, 1998, 1999 and 2000, as well as the consolidated balance sheet data as of
December 31, 1999 and 2000, are derived from our consolidated financial
statements included elsewhere in this report which have been audited by KPMG
LLP, independent auditors. You should read the selected financial data below in
conjunction with our consolidated financial statements, including the related
notes, and the information in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1996 1997 1998 1999 2000
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue..................................................... $21,022 $49,605 $ 89,384 $117,489 $139,423
Operating expenses:
Residence operating expenses.............................. 14,055 31,591 57,443 81,767 95,032
Corporate general and administrative...................... 1,864 4,050 11,099 21,178 18,365
Building rentals.......................................... 3,949 7,969 12,764 15,367 16,004
Depreciation and amortization............................. 1,094 3,683 6,339 8,981 9,923
Litigation settlement..................................... -- -- -- -- 10,020
Terminated merger expense................................. -- -- 1,068 228 --
Site abandonment costs.................................... -- -- 2,377 4,912 --
Write-off of impaired assets and related expenses......... -- -- 8,521 -- --
------- ------- -------- -------- --------
Total operating expenses............................ 20,962 47,293 99,611 132,433 149,344
------- ------- -------- -------- --------
Operating income (loss)..................................... 60 2,312 (10,227) (14,944) (9,921)
------- ------- -------- -------- --------
Other income (expense):
Interest expense.......................................... (1,146) (4,946) (11,039) (15,200) (16,363)
Interest income........................................... 455 1,526 3,869 1,598 786
Gain (loss) on sale of assets............................. (854) (1,250) (651) (127) 13
Loss on sale of marketable securities..................... -- -- -- -- (368)
Debenture conversion costs................................ (426) -- -- -- --
Other income (expense), net............................... (4) (121) (1,174) (260) 67
------- ------- -------- -------- --------
Total other expense................................. (1,975) (4,791) (8,995) (13,989) (15,865)
------- ------- -------- -------- --------
Loss before cumulative effect of change in accounting
principle................................................. (1,915) (2,479) (19,222) (28,933) (25,786)
Cumulative effect of change in accounting principle......... -- -- (1,523) -- --
------- ------- -------- -------- --------
Net loss.................................................... $(1,915) $(2,479) $(20,745) $(28,933) $(25,786)
======= ======= ======== ======== ========
Basic and diluted net loss per common share:
Loss before cumulative effect of change in accounting
principle................................................. $ (0.23) $ (0.21) $ (1.18) $ (1.69) $ (1.51)
Cumulative effect of change in accounting principle......... -- -- (0.09) -- --
------- ------- -------- -------- --------
Basic and diluted net loss per common share................. $ (0.23) $ (0.21) $ (1.27) $ (1.69) $ (1.51)
======= ======= ======== ======== ========
Basic and diluted weighted average common shares
outstanding............................................... 8,404 11,871 16,273 17,119 17,121
======= ======= ======== ======== ========
AT DECEMBER 31,
--------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,105 $ 63,269 $ 55,036 $ 7,606 $ 9,889
Working capital (deficit)................................... (27,141) 40,062 43,856 37 (16,983)
Total assets................................................ 147,223 324,367 414,669 346,188 336,458
Long-term debt, excluding current portion................... 49,663 157,700 266,286 233,199 231,657
Shareholders' equity........................................ 56,995 132,244 119,197 89,344 63,886
16
18
QUARTERLY FINANCIAL DATA
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE, OCCUPANCY AND AVERAGE RENTAL DATA)
1999 QUARTERLY FINANCIAL DATA 2000 QUARTERLY FINANCIAL DATA
------------------------------------------------ -------------------------------------------------
1ST 2ND 3RD 4TH YEAR TO 1ST 2ND 3RD 4TH YEAR TO
RESULTS OF OPERATIONS QTR QTR QTR QTR DATE QTR QTR QTR QTR DATE
--------------------- ------- ------- ------- ------- -------- ------- ------- -------- ------- --------
Revenue.................... $26,583 $28,479 $30,398 $32,029 $117,489 $33,132 $34,146 $ 35,308 $36,837 $139,423
Operating income (loss).... (4,243) (6,115) (2,561) (2,025) (14,944) 28 434 (8,598) (1,785) (9,921)
Net loss................... (7,660) (9,006) (6,256) (6,011) (28,933) (3,791) (3,821) (12,445) (5,729) (25,786)
Basis and diluted net loss
per common share(1)...... $ (0.45) $ (0.53) $ (0.37) $ (0.35) $ (1.69) $ (.22) $ (.22) $ (.73) $ (.34) $ (1.51)
Basic and diluted weighted
average common shares
outstanding.............. 17,116 17,116 17,121 17,121 17,119 17,121 17,121 17,121 17,121 17,121
Average monthly rental rate
per unit................. $ 1,871 $ 1,881 $ 1,903 $ 1,926 $ 1,898 $ 1,947 $ 1,974 $ 2,002 $ 2,038 $ 1,991
Average occupancy
rate(2).................. 72.9% 74.3% 76.0% 77.5% 75.1% 78.4% 79.8% 81.4% 83.1% 80.7%
End of period occupancy
rate(2).................. 73.2% 75.9% 76.5% 78.7% 78.7% 79.6% 81.6% 82.6% 83.0% 83.0%
- ---------------
(1) Quarter net loss per share amounts may not add to the full year total due to
rounding.
(2) Based upon available units.
17
19
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We operate, own and lease free-standing assisted living residences. These
residences are primarily located in small middle-market rural and suburban
communities with a population typically ranging from 10,000 to 40,000. We
provide personal care and support services, and make available routine nursing
services (as permitted by applicable law) designed to meet the personal and
health care needs of our residents. As of December 31, 2000, we had operations
in 16 states.
We experienced significant and rapid growth between 1994 and 1998,
primarily through the development of assisted living residences and, to a lesser
extent, through the acquisition of assisted living residences. At the closing of
our initial public offering in November 1994, we had an operating base of five
leased residences (137 units) located in Oregon. We opened twenty residences
(798 units) in 1999 and no residences in 2000. As of December 31, 2000, we
operated 185 residences (7,149 units), of which we owned 115 residences (4,515
units) and leased 70 residences (2,634 units).
We derive our revenues primarily from resident fees for the delivery of
assisted living services. Resident fees typically are paid monthly by residents,
their families, state Medicaid agencies or other third parties. Resident fees
include revenue derived from a multi-tiered rate structure, which varies based
on the level of care provided. Resident fees are recognized as revenues when
services are provided. Our operating expenses include:
- residence operating expenses, such as staff payroll, food, property
taxes, utilities, insurance and other direct residence operating
expenses;
- general and administrative expenses consisting of regional management and
corporate support functions such as legal, accounting and other
administrative expenses;
- building rentals; and
- depreciation and amortization.
We anticipate that the majority of our revenues will continue to come from
private pay sources. However, we believe that by having located residences in
states with favorable regulatory and reimbursement climates, we should have a
stable source of residents eligible for Medicaid reimbursement to the extent
that private pay residents are not available and, in addition, provide our
private pay residents with alternative sources of income when their private
funds are depleted and they become Medicaid eligible.
Although we manage the mix of private paying tenants and Medicaid paying
tenants residing in our facilities, any significant increase in our Medicaid
population could have an adverse effect on our financial position, results of
operations or cash flows, particularly if states operating these programs
continue to or more aggressively seek limits on reimbursement rates. See "Risk
Factors -- We depend on reimbursement by third-party payors."
We believe that our current cash on hand, cash available from operations
and financing by Heller will be sufficient to meet our working capital needs
through July 2002. However, we will have up to $45.0 million in principal from
the Heller financing maturing on August 31, 2002 (unless the five wholly owned
subsidiaries, which are the borrowers, are able to and do extend the maturity
dates for up to three six-month extensions), and have $161.3 million (less any
amounts repurchased with the Heller line of credit) in principal amount of
convertible debentures maturing between November 2002 and May 2003. We also
expect the cost to maintain our long-lived assets in their present condition to
increase; however, we cannot yet estimate the financial impact since our
experience is limited due to the newness of these assets.
We are currently exploring various alternatives to address our financing
needs and the maturities of our long-term debt. The Heller and Red Mortgage
financings have been sought to fund potential working capital needs, to fund the
cost of our shareholders' litigation settlement, the repurchase of 16 of our
leased properties and the repurchase of some of our convertible debentures in
the open market. We expect to replace the Red Mortgage financing with long-term
HUD mortgage loans and we also expect to replace a substantial portion of
18
20
the Heller financing with long-term HUD mortgage loans, to the extent the
processing time and increasing limitations by HUD on submission of applications
and amount financed permit. In addition, we are also considering issuing new
securities with longer maturities to the holders of our convertible debentures
in exchange for some or all of their debentures. We have 48 unencumbered
residences available to use as collateral for these various alternatives, 47 of
which are subject to negative covenants not to encumber them except under
certain circumstances, including the use of the net proceeds of the financing
which they secure for the reduction of our indebtedness to our convertible
debenture holders. No commitments are currently in place and there can be no
assurance that our efforts will be successful, in which event we will have to
consider other alternatives, including reorganization under the bankruptcy laws
or raising highly dilutive capital through the issuance of equity or
equity-related securities.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, operating
expenses as a percentage of revenue.
YEARS ENDED DECEMBER 31,
--------------------------
1998 1999 2000
------ ------ ------
Revenue..................................................... 100.0% 100.0% 100.0%
Operating expenses:
Residence operating expenses.............................. 64.3% 69.6% 68.1%
Corporate general and administrative...................... 12.4% 18.0% 13.2%
Building rentals.......................................... 12.8% 12.0% 10.6%
Building rentals to related party......................... 1.5% 1.1% 0.9%
Depreciation and amortization............................. 7.1% 7.6% 7.1%
Litigation settlement..................................... -- -- 7.2%
Terminated merger expense................................. 1.2% 0.2% --
Site abandonment costs.................................... 2.7% 4.2% --
Write-off of impaired assets and related expenses......... 9.5% -- --
----- ----- -----
Total operating expenses.......................... 111.4% 112.7% 107.1%
----- ----- -----
Operating loss.............................................. (11.4)% (12.7)% (7.1)%
----- ----- -----
Other income (expense):
Interest expense.......................................... (12.4)% (12.9)% (11.7)%
Interest income........................................... 4.3% 1.4% 0.6%
Gain (loss) on sale of assets............................. (0.7)% (0.1)% --
Loss on sale of marketable securities..................... -- -- (0.3)%
Other income (expense), net............................... (1.3)% (0.2)% --
----- ----- -----
Total other income (expense)...................... (10.1)% (11.9)% (11.4)%
----- ----- -----
Loss before cumulative effect of change in accounting
principle................................................. (21.5)% (24.6)% (18.5)%
Cumulative effect of change in accounting principle......... (1.7)% -- --
----- ----- -----
Net loss.................................................... (23.2)% (24.6)% (18.5)%
===== ===== =====
19
21
The following table sets forth, for the periods presented, the number of
total residences and units operated, average occupancy rates and the sources of
our revenue. The portion of revenues received from state Medicaid agencies are
labeled as "Medicaid state portion" while the portion of our revenues that a
Medicaid-eligible resident must pay out of his or her own resources is labeled
"Medicaid resident portion."
YEARS ENDED DECEMBER 31,
--------------------------
TOTAL RESIDENCES 1998 1999 2000
---------------- ------ ------ ------
Residences operated (end of period)......................... 165 185 185
Units operated (end of period).............................. 6,329 7,148 7,149
Average occupancy rate (based on occupied units)............ 72.3% 75.1% 80.7%
Sources of revenue:
Medicaid state portion.................................... 10.7% 10.4% 11.1%
Medicaid resident portion................................. 5.8% 5.9% 6.2%
Private................................................... 83.5% 83.7% 82.7%
----- ----- -----
Total............................................. 100.0% 100.0% 100.0%
===== ===== =====
The following table sets forth, for the periods presented, the total number
of residences and units operated, average occupancy rates and the sources of our
revenue for the 59 Same Store Residences included in operating results for all
of fiscal years 1997 and 1998, and the 108 Same Store Residences included in
operating results for all of fiscal years 1998 and 1999 and the 165 Same Store
Residences included in operating results for all of fiscal years 1999 and 2000.
Same Store Residences are defined as those residences, which were operating
throughout comparable periods.
YEARS ENDED YEARS ENDED YEARS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
-------------- -------------- --------------
SAME STORE RESIDENCES 1997 1998 1998 1999 1999 2000
--------------------- ----- ----- ----- ----- ----- -----
Residences operated (end of period)........ 59 59 108 108 165 165
Units operated (end of period)............. 2,104 2,157 4,035 4,048 6,350 6,351
Average occupancy rate (based on occupied
units)................................... 86.9% 93.5% 80.5% 84.7% 77.8% 83.7%
Sources of revenue:
Medicaid state portion................... 11.9% 15.1% 12.7% 13.4% 10.8% 12.1%
Medicaid resident portion................ 6.5% 8.7% 6.9% 7.7% 6.1% 6.7%
Private.................................. 81.6% 76.2% 80.4% 78.9% 83.1% 81.2%
----- ----- ----- ----- ----- -----
Total............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
The following table sets forth, for the periods presented, the results of
operations for the 59 Same Store Residences included in operating results for
all of fiscal years 1997 and 1998, and the 108 Same Store Residences included in
operating results for all of fiscal years 1998 and 1999 and the 165 Same Store
Residences included in operating results for all of fiscal years 1999 and 2000
(in thousands).
YEARS ENDED YEARS ENDED YEARS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
----------------- ----------------- -------------------
SAME STORE RESIDENCES 1997 1998 1998 1999 1999 2000
--------------------- ------- ------- ------- ------- -------- --------
Revenue................................ $38,274 $42,002 $70,920 $77,881 $113,511 $127,943
Residence operating expenses........... 22,908 24,801 43,659 52,154 77,396 85,689
------- ------- ------- ------- -------- --------
Residence operating income............. 15,366 17,201 27,261 25,727 36,115 42,254
Building rentals....................... 5,635 6,375 12,385 14,825 15,336 15,977
Depreciation and amortization.......... 2,280 1,647 3,451 3,067 7,181 7,181
------- ------- ------- ------- -------- --------
Total other operating
expenses................... 7,915 8,022 15,836 17,892 22,517 23,158
------- ------- ------- ------- -------- --------
Operating income............. $ 7,451 $ 9,179 $11,425 $ 7,835 $ 13,598 $ 19,096
======= ======= ======= ======= ======== ========
20
22
Year ended December 31, 2000 compared to year ended December 31, 1999:
CONSOLIDATED SAME STORE RESIDENCES
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
------------------------------ ------------------------------
INCREASE/ INCREASE/
1999 2000 (DECREASE) 1999 2000 (DECREASE)
------ ------ ---------- ------ ------ ----------
(IN MILLIONS) (IN MILLIONS)
Revenue......................... $117.5 $139.4 18.6% $113.5 $127.9 12.7%
Operating expenses:
Residence operating
expenses................... 81.8 95.0 16.1% 77.4 85.7 10.7%
Corporate general and
administrative............. 21.2 18.4 (13.2)% -- -- --
Building rentals.............. 15.4 16.0 3.9% 15.3 16.0 4.6%
Depreciation and
amortization............... 9.0 9.9 10.0% 7.2 7.2 --
Litigation settlement......... -- 10.0 100.0% -- -- --
Terminated merger expense..... 0.2 -- (100.0)% -- -- --
Site abandonment costs........ 4.9 -- (100.0)% -- -- --
------ ------ ------ ------ ------ ----
Total operating
expenses............ 132.5 149.3 12.7% 99.9 108.9 9.0%
------ ------ ------ ------ ------ ----
Operating income
(loss).............. $(15.0) $ (9.9) 34.0% $ 13.6 $ 19.0 39.7%
====== ====== ====== ====== ====== ====
We incurred a net loss of $25.8 million, or $1.51 per basic and diluted
share, on revenue of $139.4 million for the year ended December 31, 2000 (the
"2000 Period") as compared to a net loss of $28.9 million, or $1.69 per basic
and diluted share, on revenue of $117.5 million for the year ended December 31,
1999 (the "1999 Period").
We had certificates of occupancy for 185 residences, all of which were
included in the operating results as of the end of both the 2000 Period and 1999
Period. Of the residences included in operating results as of the end of the
2000 Period and 1999 Period, we owned 115 residences and leased 70 residences
(all of which were operating leases).
Revenue. Revenue was $139.4 million for the 2000 Period as compared to
$117.5 million for the 1999 Period, an increase of $21.9 million or 18.6%.
The increase includes:
- $7.5 million related to the full year impact of the 20 residences (798
units) which opened during the 1999 Period;
- $14.4 million was attributable to the 165 Same Store Residences (6,351
units).
Revenue from the Same Store Residences was $127.9 million for the 2000
Period as compared to $113.5 million for the 1999 Period, an increase of $14.4
million or 12.7%. The increase in revenue from Same Store Residences was
attributable to a combination of an increase in average occupancy to 83.7% and
average monthly rental rate to $1,985 for the 2000 Period as compared to average
occupancy of 77.8% and average monthly rental rate of $1,891 for these same
stores in the 1999 Period.
Residence Operating Expenses. Residence operating expenses were $95.0
million for the 2000 Period as compared to $81.8 million for the 1999 Period, an
increase of $13.2 million or 16.2%.
The increase includes:
- $4.9 million related to the full year impact of the 20 residences (798
units) which opened during the 1999 Period;
- $8.3 million was attributable to the 165 Same Store Residences (6,351
units).
Residence operating expenses for the Same Store Residences were $85.7
million for the 2000 period as compared to $77.4 million for the 1999 Period, an
increase of $8.3 million or 10.7%.
21
23
The principal elements of the increase in Same Store residence operating
expenses are:
- $4.2 million related to additional payroll expenses incurred in
connection with the increase in occupancy at the Same Store Residences
during the period;
- $1.4 million related to increase in real estate taxes as a result of
changes in assessments;
- $1.3 million related to provision for uncollectible rent due to the
completion of an assessment of our accounts receivable collections
process begun during the three months ended December 31, 2000. As a
result, we increased our provision for bad debts, primarily related to
private pay accounts, and wrote off or reserved balances where the
probability of collection was low;
- $378,000 related to increase in utility costs as a result of increase in
rates and increase in usage as result of an increase in occupancy; and
- $277,000 related to increase in maintenance expense associated with the
upkeep of our buildings.
Corporate General and Administrative. Corporate general and administrative
expenses as reported were $18.4 million for the 2000 Period as compared to $21.2
million for the 1999 Period. Our corporate general and administrative expenses
before capitalized payroll costs were $21.8 million for the 1999 Period compared
to $18.4 million for the 2000 Period, a decrease of $3.4 million. The principal
elements of the decrease include:
- $2.8 million related to decreased professional fees primarily associated
with legal, financial advisory and accounting costs due to regulatory
issues, securityholder litigation and the restatement of our financial
statements for the years ended December 31, 1996, 1997 and the first
three fiscal quarters of 1998;
- $1.2 million as a result of reimbursement of legal and professional fees
from our insurance carrier as a result of the settlement of our
litigation related to the restatement of the financial statements for the
years ended December 31, 1996 and 1997 and the first three fiscal
quarters of 1998. Of the $1.2 million in reimbursements, we incurred
approximately $600,000 of these expenses during the 2000 Period and the
remaining $600,000 during the year ended December 31, 1999; and
- $1.8 million in the 1999 Period related to the final operations of our
home health business.
The decrease was offset by increases in corporate, general and
administrative expense of:
- $1.3 million related to increased network costs associated with the
development of our communications infrastructure, including dial-up and
intranet access for our remote locations;
- $500,000 related to increased payroll costs, including severance costs of
$1.2 million relating to former officers; and
- $700,000 related to increased premiums for our directors and officers and
liability insurance policies.
We capitalized $617,000 of payroll costs associated with the development of
new residences during the 1999 Period. Since we discontinued our development
activities during the 1999 Period, we did not capitalize any payroll costs in
the 2000 Period.
Building Rentals. Building rentals were $16.0 million for the 2000 Period
as compared to $15.4 million for the 1999 Period, an increase of $600,000 or
3.9%. This increase was primarily attributable to the additional rental expense
associated with the March 1999 amendment of 16 of our leases which were
previously accounted for as financings. The amendment eliminated our continuing
involvement in the residences in the form of a fair value purchase option. As a
result of the amendment, the leases have been reclassified as operating leases
for the last nine months of the 1999 Period and the full 2000 Period.
Depreciation and Amortization. Depreciation and amortization was $9.9
million for the 2000 Period as compared to $9.0 million for the 1999 Period, an
increase of $900,000 or 10.0%. Depreciation expense was $9.6 million and
amortization expense related to goodwill was $292,000 for the 2000 Period as
compared to $8.7 million and $294,000, respectively, for the 1999 Period. The
increase in depreciation is the result of a full
22
24
year of depreciation associated with the 20 owned residences that commenced
operations during the 1999 Period.
Litigation Settlement. During the third quarter of the 2000 Period we
settled the class action litigation against us related to the restatement of our
financial statements for the years ended December 31, 1996 and 1997 and the
first three fiscal quarters of 1998. The total cost of this settlement to us was
$10.0 million. Accordingly, we recognized a charge of $10.0 million during the
2000 Period. We received reimbursements of approximately $1.2 million from our
corporate liability insurance carriers and other parties in relation to the
settlement. The $1.2 million of reimbursements has been recorded as a reduction
of corporate, general and administrative expenses as discussed above.
Site Abandonment Costs. In 1999, the Company wrote-off $4.9 million of
capitalized cost relating to the abandonment of all remaining development sites,
with the exception of 10 sites where the Company owns the land.
Interest Expense. Interest expense was $16.4 million for the 2000 Period as
compared to $15.2 million for the 1999 Period. Interest expense before
capitalization for the 2000 Period was $16.4 million as compared to $17.2
million for the 1999 Period, a net decrease of $800,000.
Interest expense decreased by:
- $840,000 due to the March 1999 amendment of 16 of our operating leases
which were previously accounted for as financings. As a result, the
leases were accounted for as operating leases, effective March 31, 1999.
Accordingly, rent expense related to such leases after the date of the
amendment, has been classified as building rentals, rather than interest
expense;
- $80,000 due to financing fees related to variable rate debt and letter of
credit renewals; and
- $95,000 due to interest expense associated with the repayment of joint
venture advances in February 1999.
This decrease was offset by an increase in interest expense of $215,000 as
a result of increases in interest rates on variable rate debt.
We capitalized $2.0 million of interest expense for the 1999 Period. There
was no capitalized interest in the 2000 Period as a result of the
discontinuation of our development activities.
Interest Income. Interest income was $786,000 for the 2000 Period as
compared to $1.6 million for the 1999 Period, a decrease of $814,000. The
decrease is related to interest income earned on lower average cash balances
during the 2000 Period.
Loss on Sale of Marketable Securities. Loss on sale of marketable
securities was $368,000 for the 2000 Period as a result of the sale of
securities with a historical cost basis of $2.0 million for proceeds of $1.6
million.
Gain (Loss) on Sale of Assets. Gain on sale of assets was $13,000 for the
2000 Period as compared to a loss of $127,000 for the 1999 Period. The gain
during the 2000 Period was related to the sale of miscellaneous equipment. The
loss during the 1999 Period was related to the disposal of leasehold
improvements associated with relocating our corporate offices in January 1999.
Other Income (Expense). Other income was $67,000 for the 2000 Period as
compared to other expense of $260,000 for the 1999 Period. Other income during
the 2000 Period was primarily related to a contract to provide development
services to a third party. Other expenses during the 1999 Period included
$170,000 of administrative fees incurred in connection with our February 1999
repurchase of the remaining joint venture partner's interest in the operations
of 17 residences.
Net Loss. As a result of the above, net loss was $25.8 million or $1.51 per
basic and diluted share for the 2000 Period, compared to a net loss of $28.9
million or $1.69 loss per basic and diluted share for the 1999 Period.
23
25
Year ended December 31, 1999 compared to year ended December 31, 1998:
CONSOLIDATED SAME STORE RESIDENCES
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
------------------------------ ----------------------------
INCREASE/ INCREASE/
1998 1999 (DECREASE) 1998 1999 (DECREASE)
------ ------ ---------- ----- ----- ----------
(IN MILLIONS) (IN MILLIONS)
Revenue........................... $ 89.4 $117.5 31.4% $70.9 $77.9 9.9%
Operating expenses:
Residence operating expenses.... 57.4 81.8 42.5% 43.7 52.2 19.5%
Corporate general and
administrative............... 11.1 21.2 91.0% -- -- --
Building rentals................ 12.8 15.4 20.3% 12.4 14.8 19.4%
Depreciation and amortization... 6.3 9.0 42.9% 3.5 3.1 (11.4)%
Terminated merger expense....... 1.1 0.2 (81.8)% -- -- --
Site abandonment costs.......... 2.4 4.9 104.2% -- -- --
Write off of impaired assets and
related expenses............. 8.5 -- (100.0)% -- -- --
------ ------ ------ ----- ----- -----
Total operating
expenses.............. 99.6 132.5 33.0% 59.6 70.1 17.6%
------ ------ ------ ----- ----- -----
Operating income
(loss)................ $(10.2) $(15.0) 47.1% $11.3 $ 7.8 (31.0)%
====== ====== ====== ===== ===== =====
We incurred a net loss of $28.9 million, or $1.69 per basic and diluted
share, on revenue of $117.5 million for the year ended December 31, 1999 (the
"1999 Period") as compared to a net loss (after the cumulative effect of change
in accounting principle and other charges as described below) of $20.7 million,
or $1.27 per basic and diluted share, on revenue of $89.4 million for the year
ended December 31, 1998 (the "1998 Period").
We had certificates of occupancy for 185 residences, all of which were
included in the operating results as of the end of the 1999 Period as compared
to certificates of occupancy for 173 residences, 165 of which were included in
the operating results as of the end of the 1998 Period. Of the residences
included in operating results as of the end of the 1999 Period, we owned 115
residences and leased 70 residences (all of which were operating leases) as
compared to 95 owned residences and 70 leased residences (54 of which were
operating leases and 16 of which were accounted for as financings) as of the end
of the 1998 Period.
Revenue. Revenue was $117.5 million for the 1999 Period as compared to
$89.4 million for the 1998 Period, an increase of $28.1 million or 31.4%.
The increase includes:
- $20.8 million related to the full year impact of the 57 residences (2,302
units) which opened during the 1998 Period;
- $3.9 million related to the opening of an additional 20 residences (798
units) during the 1999 Period; and
- $7.0 million was attributable to the 108 Same Store Residences (4,048
units).
These increases were offset by:
- a reduction in revenues from home health operations of $3.1 million in
the 1999 Period (the Company exited all home health operations in 1998
and did not earn any revenues for such services during the 1999 Period);
and
- a reduction of $558,000 in revenues for a residence the Company leased
and operated for nine months of the 1998 Period. The lease was terminated
September 30, 1998.
Revenue from the Same Store Residences was $77.9 million for the 1999
Period as compared to $70.9 million for the 1998 Period, an increase of $7.0
million or 9.9%. The increase in revenue from Same Store Residences was
attributable to a combination of an increase in average occupancy to 84.7% and
average
24
26
monthly rental rate to $1,873 for the 1999 Period as compared to average
occupancy of 80.5% and average monthly rental rate of $1,823 for the 1998
Period.
Residence Operating Expenses. Residence operating expenses were $81.8
million for the 1999 Period as compared to $57.4 million for the 1998 Period, an
increase of $24.4 million or 42.5%.
The increase includes:
- $13.9 million related to the full year impact of the 57 residences (2,302
units) which opened during the 1998 Period;
- $4.3 million related to the opening of an additional 20 residences (798
units) during the 1999 Period; and
- $8.5 million was attributable to the 108 Same Store Residences (4,048
units).
These increases were offset by a reduction in expenses associated with our
home health operations of $2.3 million. We exited our home health operations
during the 1998 Period. Expenses incurred during the 1999 Period for home health
operations were related to the closure of the home health operations and are
included in Corporate, General and Administrative expenses.
Residence operating expenses for the Same Store Residences were $52.2
million for the 1999 Period as compared to $43.7 million for the 1998 Period, an
increase of $8.5 million or 19.4%. This increase results from the additional
expenses incurred in connection with the increase in occupancy at the Same Store
Residences during the period.
Corporate General and Administrative. Corporate general and administrative
expenses as reported were $21.2 million for the 1999 Period as compared to $11.1
million for the 1998 Period. Our corporate general and administrative expenses
before capitalized payroll costs were $21.8 million for the 1999 Period as
compared to $12.9 million for the 1998 Period, an increase of $8.9 million. Of
the increase:
- $1.7 million, or 19.1%, related to increased payroll costs, including
severance costs of $1.0 million for certain terminated corporate
employees including costs associated with severance and consulting
agreements between us and our former chief executive officer;
- $4.3 million, or 48.3%, related to additional professional fees primarily
associated with increased legal, financial advisory and accounting costs
due to regulatory issues, securityholder litigation and the restatement
of our financial statements for the years ended December 31, 1996, 1997
and the first three fiscal quarters of 1998;
- $1.8 million, or 20.2%, related to the final operations of our home
health business, including provision for bad debt of $510,000;
- $1.1, or 12.4% related to an increase in travel and other related
expenses associated with the increase in number of regional offices from
three to five.
We capitalized $1.8 million and $617,000 of payroll costs associated with
the development of new residences for each of the 1998 Period and the 1999
Period.
Building Rentals. Building rentals were $15.4 million for the 1999 Period
as compared to $12.8 million for the 1998 Period, an increase of $2.6 million.
This increase was primarily attributable to $2.5 million of additional rental
expense associated with the March amendment of 16 of our leases, as discussed
above, which were previously accounted for as financings. As a result of the
amendment, the leases have been reclassified as operating leases for the last
nine months of the 1999 Period.
As of the end of the 1999 Period we had 70 operating leases as compared to
54 operating leases as of the end of the 1998 Period.
25
27
Depreciation and Amortization. Depreciation and amortization was $9.0
million for the 1999 Period as compared to $6.3 million for the 1998 Period, an
increase of $2.7 million. Depreciation expense was $8.7 million and amortization
expense was $294,000 for the 1999 Period as compared to $5.9 million and
$398,000, respectively, for the 1998 Period. The increase in depreciation is the
result of:
- the full year effect of depreciation on the 53 owned residences which
commenced operations during the 1998 Period; and
- depreciation associated with the 20 owned residences that commenced
operations during the 1999 Period.
The increase in depreciation was offset by the impact of the March
amendment of 16 of our leases, as discussed above, which were previously
accounted for as financings. As a result of this amendment, the 1999 Period
reflects 3 months of depreciation expense associated with these facilities as
compared to 12 months in the 1998 Period.
Terminated Merger Expense. During the fourth quarter of the 1998 Period, we
recorded a $1.1 million charge relating to our terminated merger with American
Retirement Corporation ("ARC"). On February 1, 1999 we agreed with ARC to
terminate our previously announced merger agreement, which had been entered into
during November 1998. We incurred approximately $228,000 of additional merger
related expenses during the first quarter of 1999.
Site Abandonment Costs. As a result of our decision to reduce the number of
new residence openings during the 1998 Period and beyond, we wrote-off $2.4
million of capitalized costs during the 1998 Period relating to the abandonment
of certain development sites. In 1999, the Company wrote-off $4.9 million of
capitalized cost relating to the abandonment of all remaining development sites,
with the exception of 10 sites where the Company owns the land.
Write-Off of Impaired Assets and Related Expenses. In the 1998 Period, we
recorded an $8.5 million charge consisting of a $7.5 million write-off of
unamortized goodwill resulting from the exit from our home health operations and
a $1.0 million provision for exit costs associates with closing such home health
care operations. We recorded no such charges for the 1999 Period.
Interest Expense. Interest expense was $15.2 million for the 1999 Period as
compared to $11.0 million for the 1998 Period. Gross interest expense for the
1999 Period was $17.2 million as compared to $17.0 million for the 1998 Period,
a net increase of $200,000.
Interest expense increased by:
- $1.4 million due to interest expense related to the April 1998 issuance
of 5.625% Debentures; and
- $2.3 million related to the new mortgage financing entered into during
the 1998 Period.
This increase was offset by decreases in interest expense of:
- $616,000 as a result of the redemption in August 1998 of the 7.0%
Convertible Subordinated Debentures due 2005 (the "7.0% Debentures");
- $2.5 million as a result of the amendment of the 16 leases resulting in a
change from financing obligations to operating leases; and
- $380,000 as a result of the termination of the joint venture agreements
in February, 1999.
We capitalized $6.0 million of interest expense for the 1998 Period
compared to $2.0 million for the 1999 Period.
Interest Income. Interest income was $1.6 million for the 1999 Period as
compared to $3.9 million for the 1998 Period, a decrease of $2.3 million. The
decrease is related to interest income earned on lower average cash balances
during the 1999 Period primarily resulting from the completion of construction
on 20 residences which opened during 1999.
26
28
Loss on Sale of Assets. Loss on sale of assets was $127,000 for the 1999
Period as compared to $651,000 for the 1998 Period. The loss during the 1999
Period was related to the disposal of leasehold improvements associated with
relocating our corporate offices in January 1999. Of the loss on sale of assets
recorded during the 1998 Period, $547,000 resulted from losses pertaining
primarily to additional capital costs incurred during the 1998 Period on sale
and leaseback transactions completed in the 1997 Period and $75,000 related to
losses incurred in connection with terminating one operating lease during the
1998 Period. The remainder of the loss on sale of assets was attributable to
losses incurred in connection with one sale and leaseback transaction completed
during the 1998 Period.
Other Income (Expense). Other expense was $260,000 for the 1999 Period as
compared to $1.2 million for the 1998 Period. Other expenses during the 1999
Period included $170,000 of administrative fees incurred in connection with our
February 1999 repurchase of the remaining joint venture partner's interest in
the operations of 17 residences. Other expense during the 1998 Period included
$907,000 of financing costs which were expensed during the period. Of such
amount, $614,000 related to financing costs which had been previously
capitalized in association with a financing commitment that was terminated
during the fourth quarter 1998 and the remaining $293,000 was associated with
the termination of a swap agreement at the end of the third quarter of the 1998
Period. In addition, other expenses during the 1998 Period included $210,000 of
administrative fees incurred in connection with our repurchase of the joint
venture partner's interest in the operations of 21 residences during the period.
Cumulative Effect of Change in Accounting Principle. We adopted AICPA
Statement of Position 98-5, Reporting on the Costs of Start-up Activities ("SOP
98-5") effective January 1, 1998. Under SOP 98-5, start-up costs associated with
the opening of new residences are expensed as incurred. We recognized a charge
of $1.5 million during the 1998 Period associated with adopting such provision.
We had no changes in accounting principle during the 1999 Period.
Net Loss. As a result of the above, net loss (after the cumulative effect
of change in accounting principle and other charges as described above) was
$28.9 million or $1.69 per basic and diluted share for the 1999 Period, compared
to a net loss of $20.7 million or $1.27 loss per basic and diluted share for the
1998 Period.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, we had a working capital deficit of $17.0 million
(including current portion of settlement payable of $7.8 million) and
unrestricted cash and cash equivalents of $9.9 million.
Net cash provided by operating activities was $700,000 during the year
ended December 31, 2000.
Net cash used in investing activities totaled $808,000 during the year
ended December 31, 2000. The primary sources of cash were $1.6 million related
to the sale of marketable securities and a decrease of $1.1 million of
restricted cash due to the release of funds restricted per the terms of
agreements with U.S. Bank. We used $3.5 million of cash in investing activities
related to capital expenditures.
Net cash provided by financing activities totaled $2.4 million during the
year ended December 31, 2000. Proceeds of $4.0 were received on a short-term
bridge loan secured by three previously encumbered assets. The use of cash in
financing activities was due to principal payments on long term debt of $1.6
million.
On March 12, 2001, we amended certain loan documents with U.S. Bank.
Pursuant to the amendment, we agreed to pay fees of $34,700 in exchange for the
following: the modification of certain financial covenants, and the waiver of
U.S. Bank's right to declare an event of default for our failure to comply with
c